1HFY20 revenue accelerated (+90% YoY) as E&C and drilling activities picks up steam. Despite this, earnings was underwhelming as Sapura navigates through the S-curve, where fixed costs and sub-optimal utilisation rates overwhelms revenues resulting in weaker margins for now. This was further compounded by weaker JV & associates contribution (-25% YoY). We cut our FY20 projection to -RM341.1m from -RM132.9m, factoring in lower margins from the E&C segment for FY20; however we are keeping our FY21-22 numbers intact. Downgrade to HOLD with lower TP of RM0.31 (from RM0.35) pegged to lower 0.45x FY20 P/B.

Below expectations. 2QFY20 revenue of RM1,927m (+18% QoQ, +30% YoY) with core net loss of -RM113.1m brought 1HFY20 core net loss of -RM316.3m (from 1HFY19 core net loss of -RM383.2m). The results came below expectations as compared to ours/consensus FY20 core loss/profit estimates of -RM132.9m/RM65.3m respectively. The negative deviation was largely due to thinner margins from the E&C segment as it navigates through the starting tail of the S-curve, where fixed costs and lower utilisation rates overwhelms revenues resulting in weaker margins and weaker JV & associates contribution (-25% YoY).

QoQ. Sapura narrowed its core net losses by RM90.1m to -RM113.1m (from - RM203.2m) in 1QFY20. The better performance was largely due to narrowing losses from the drilling segment (PBT: -RM36m vs. -RM51m QoQ) and less EI’s vs. 1QFY20. Recall that in 1QFY20 there were: (1) unrealised forex gain of RM65m (ii) RM11m PPE disposal gain (iii) RM88m settlement claims and (iv) RM70m fair value ESOS charge.

YoY. Sapura narrowed its core losses by 48% YoY from -RM217.5m in 2QFY19 largely due to (i) better performance from the E&C segment (PBT: RM27 vs. -RM20 YoY) (ii) narrowing losses from the drilling segment (PBT: -RM36 vs -RM58 YoY) and (iii) lower finance costs -37% YoY on the back of its balance sheet restructuring.

YTD. Revenue accelerated +90% YoY to RM3.6bn due to work orders seeing an uptick (E&C) and higher rig utilisation from the drilling segment. Core losses narrowed, decreasing 18% on higher revenues and lower finance costs (-21% YoY).

Outlook. Sapura announced contract wins totalling RM774m (YTD win to RM3.1bn). Order book stands at RM16.3bn, with RM4.2bn & RM5.3bn to be recognised in FY20- 21. Orderbook expansion can be expected on the back of a USD8.6bn tenderbook. We expect continuous improvements in drilling segment with 7-8 rig utilized in 2HFY20 (vs. 6 in 1HFY20). Only 1 PLSV is out of contract (to be redeployed) whilst the other one is still in service amidst extension negotiations. In preparation for higher work orders, Sapura has spent c.RM120m YTD to upgrade its Lumut yard to house larger cranes and upgrade its jetties to accommodate larger structures in future.

Forecast. We revise FY20 projections to -RM341.1m from -RM132.9m as we factor in lower margins from the E&C segment for FY20. We are keeping our FY21-22 numbers are we remain hopeful that Sapura will turn the corner and accelerate out the S-bend sooner than later.

Downgrade to HOLD, lower TP: RM0.31. In light of the results shortfall, we downgrade our call to HOLD with lower TP of RM0.31 (from RM0.35), pegging to lower 0.45x FY20 P/B (from 0.5x previously). Nonetheless, we are of the opinion that Sapura should see better sequential results as losses from the drilling segment continue to narrow and interest savings after paring down its debt. FY21 growth will be largely from SK408 gas field’s maiden contribution.

Source: Hong Leong Investment Bank Research - 30 Sept 2019